When the Bankruptcy Code was first enacted in 1978, student loan debt could be discharged either after the passage of five years since the repayment obligation began, or if repayment would impose an undue hardship on the debtor or his/her dependents. In 1990, the five-year waiting period was extended to seven years, and then in 1998, the Bankruptcy Code was amended to eliminate the waiting period altogether, leaving establishing undue hardship as the only means to discharge student loan debt as set forth in section 523(a)(8) of the Bankruptcy Code.
In assessing whether student loan debt may be discharged as an “undue hardship” under section 523(a)(8), the majority of courts follow the three-part test created by the Second Circuit in Brunner v. N.Y. State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir. 1987). The “Brunner Test” provides that student loan debt can be discharged if the debtor establishes by a preponderance of the evidence that:
- She cannot maintain, based on current income and expenses, a minimal standard of living for herself and her dependents if forced to repay the loans;
- Additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period; and
- She has made good faith efforts to repay the loans.
In application, the Brunner Test has largely proven to be a difficult burden for debtors to overcome, with discharge of student loan debt often granted only to debtors who have demonstrated dire circumstances impeding their ability to repay the debt in both the present and for the foreseeable future. Some have termed this a “certainty of hopelessness” standard.
In recent years, however, some courts have more flexibly applied the Brunner Test to at least allow for partial discharge of student loan debt. For instance, in 2018, a bankruptcy court opinion in New Jersey determined that based on the debtor’s monthly surplus income, it was appropriate to discharge the debtor’s student loan obligations maturing before June 2037, while preserving obligations maturing after that date. As a result, the debtor’s monthly student loan bill decreased from $2,609.24 to $414.26. See Hunter v. New Jersey Higher Educ. Student Assistance Auth., adv. pro, no. 15-02052-JKS (Bankr. D.N.J. April 27, 2018). In a similar decision a few months later, a Wisconsin bankruptcy court allowed for a partial student loan debt discharge reducing the debtor’s monthly student loan repayment obligation from $694 to $208. See Manion v. Modeen, adv. pro. no. 17-00071-cjf (Bankr. W.D. Wis. June 8, 2018).
In a January 2020 opinion authored by Chief Bankruptcy Judge Cecelia Morris of the Southern District of New York, a debtor’s $221,385 student loan debt was entirely discharged as an undue hardship. Chief Judge Morris opined that the Brunner Test had been warped over time, subsuming the “certainty of hopelessness” standard that was more punitive than the original design of the Brunner Test. See Rosenberg v. N.Y. State Higher Educ. Servs. Corp., 610 B.R. 454 (Bankr. S.D.N.Y. 2020). This decision, occurring within the Second Circuit and the high profile Southern District of New York, coupled with other recent decisions allowing for partial discharge of student loan debt, as well as the economic hardships resulting from the COVID-19 pandemic, fueled speculation that debtors may increasingly bring adversary proceedings to discharge student loan debt in the hope of finding an emerging trend of judicial flexibility in applying the Brunner Test.
For those hoping for potential daylight in discharging student loan debt, the Second Circuit, however, demonstrated earlier this month that it is not inclined to revisit the form of the Brunner Test at this time. See In re Tingling, 2021 WL 922448 (2d Cir. March 11, 2021). In particular, the debtor, aligning with Chief Judge Morris’ view, argued that the Brunner Test had become too onerous a burden for debtors to satisfy. The Second Circuit, however, reaffirmed the elements of the Brunner Test that it adopted nearly 25 years earlier, noting that it “reflects the Section 523(a)(8) statutory scheme exhibiting ‘clear congressional intent … to make the discharge of student loans more difficult than that of other nonexcepted debt…” The Second Circuit then affirmed the lower courts’ findings that the debtor failed to establish undue hardship.
The Second Circuit’s recent pronouncement has made clear that any large scale relief in bankruptcy for student loan debt will likely be contingent on Congressional action.